A reader who intends buying a bond-free residential property from his father at a price well below its market value wants to know whether he will pay transfer fees on the purchase price or market value.
The father and son have agreed on a price that is 20 per cent of the market value because it is the maximum amount that he can afford.
The problem with a purchase price that is well below market value is that transactions of this nature are scrutinised by Sars.
In accordance with the Transfer Duty Act, the commissioner may determine a fair value if he feels the amount payable is less than the fair value of the property.
See the reader’s question here.
The duty payable in acquiring the property shall therefore be calculated in accordance with the fair value determined or the amount the parties have agreed on, whichever is the greatest.
Under the act the commissioner can consider, inter alia, the municipal valuation of the property, a furnished sworn valuation or a valuation made by a competent and objective person he has appointed.
If the determined value exceeds the purchase price by more than a third, the costs of the valuation shall be paid by the person liable for the payment of the duty.
In this instance, where we have already determined that the reader will potentially have a problem with additional costs, it must be noted that the conveyancer’s fees will be calculated on the higher fair value of the property.
Donations tax is a further issue the reader may face.
This tax could be payable as a result of the considerable difference between the market value and the selling price agreed by the parties.
Section 62 of the Income Tax Act contains certain deeming provisions in terms of the value of properties that are donated.
The act states that for the purposes of donations tax the value of any property shall be deemed to be the fair market value of such property at the date upon which the donation takes effect.
If the commissioner finds that the amount shown in a donation is less than the fair market value, he may fix the value of that property.
That value is deemed for the purposes of the act to be the fair market value and the donations tax liability could thus result in an additional 20 per cent on the difference between the market value and the purchase price.
It is evident that the additional monies payable could be considerable.
If the nominal purchase price as agreed is all the reader can afford, the additional costs in this scenario will surely place the transaction well beyond his reach.
The reader and his father could agree that the balance of the purchase price, where the purchase price is a fair market value, be covered by way of a loan agreement between the two parties.
That loan, subject to a fair interest rate, could be paid off over an agreed period.
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